IRS Introduction

20.1.8.1  (04-17-2009)
Introduction

  1. This Section covers the miscellaneous civil penalty provisions of the Internal Revenue Code (IRC) that apply to Employee Plans (EP) and Exempt Organizations (EO).

  2. Decisions on penalty issues are to be guided by the applicable statutes, regulations, and procedural instructions issued by the Service. All employees should keep in mind the objectives in this handbook and the Penalty Policy Statement 20-1 when handling each penalty case. See IRM Exhibit 20.1.1-1.

  3. Other civil penalties that are common to EP/EO returns are discussed in the following Sections of IRM 20.1:

    1. Introduction and Penalty Relief, IRM 20.1.1

    2. Failure to File and Failure to Pay, IRM 20.1.2

    3. Estimated Tax Penalty, IRM 20.1.3

    4. Failure to Deposit, IRM 20.1.4

    5. Return Related Penalties, IRM 20.1.5

    6. Return Preparer Penalties, IRM 20.1.6

    7. Information Return Penalties, IRM 20.1.7.

  4. Managerial approval is required on all penalties in this IRM section under IRC section 6751(b)(2), except penalties for the Failure to File and Failure to Pay penalties. See IRM 20.1.1.2.3 for more discussions on managerial approval for penalty assessments.

20.1.8.1.1  (04-17-2009)
Failure to File and Failure to Pay

  1. When a delinquent income or excise tax return is received from an entity during an examination, the EP/EO employee will determine whether the failure to file and/or failure to pay penalties under IRC section 6651(a)(1) and (2) should be asserted. See IRM 20.1.2, Failure to File/Failure to Pay. The excise tax returns required to be filed in connection with employee plans and exempt organizations are:

    • Form 5330, Return of Excise Taxes Related to Employee Benefit Plans

    • Form 4720, Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the IRC

    • Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation

    • Form 730, Monthly Tax Return for Wagers.

    • Form 720, Quarterly Federal Excise Tax Return.

  2. The income tax returns required of certain exempt organizations and trusts are:

    • Form 990-T, Exempt Organization Business Income Tax Return

    • Form 1041, U.S. Income Tax Return for Estates and Trusts

    • Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations.

  3. There is no statutory prohibition against asserting the fraud penalty under IRC section 6663 and the fraudulent failure to file penalty under IRC section 6651(f) for the same year. Both penalties, however, should be asserted only in the most egregious cases. The court is not likely to sustain the assertion of both penalties unless compelling facts support the Service's position. Area Counsel should be consulted before asserting both of these penalties on the same return. For more information regarding restrictions on the assertion of the civil fraud penalty with respect to the failure to file and fraudulent failure to file, see IRM 20.1.2.

20.1.8.1.2  (04-17-2009)
IRC Section 6662(f)— Accuracy-Related Penalty— Substantial Overstatement of Pension Liabilities

  1. IRC section 6662(a) imposes a penalty on a taxpayer equal to 20 percent of any underpayment to which the section applies. Under IRC sections 6662(b)(4) and (f), this section applies to underpayments attributable to deductions for employer contributions to a defined benefit plan or retirement annuity plan where such deductions are based on a substantial overstatement of liabilities under the plan.

20.1.8.1.2.1  (04-17-2009)
Penalty Assertion

  1. In general there is an overstatement of pension liabilities if the actuarial determination of pension liabilities taken into account for deduction purposes, under IRC section 404(a)(1) or (2), exceeds the amount determined to be the correct amount of such liability. Below are examples of overstatement of pension liabilities :

    1. The valuation of the liabilities is based on unreasonable actuarial assumptions or methods that accelerate deductions either in a manner that is inconsistent with the regulations under IRC section 412, relating to acceptable funding methods, or by taking benefits in excess of those permitted under IRC section 415.

    2. The Service has determined that deductions are to be disallowed because liabilities are overstated for other reasons based on the facts and circumstances.

  2. A substantial overstatement occurs when the actuarial determination of the liabilities taken into account for purposes of computing the deduction under IRC section 404(a)(1) or (2) is 200 percent or more of the amount determined to be the correct amount.

  3. Due Date. The accuracy-related penalty applies to an underpayment of tax reported on a return filed regardless of whether the return is timely. The penalty does not apply, however, to a substitute for return filed by the Secretary under IRC section 6020(b).

  4. Penalty Computation. The penalty under IRC section 6662(a) is computed by multiplying the underpayment of tax attributable to the substantial overstatement of pension liabilities by 20 percent. No penalty is imposed under IRC section 6662(f)(2) unless the portion of the underpayment for the taxable year attributable to the substantial overstatement of pension liabilities exceeds $1,000.The penalty under IRC section 6662(a) by reason of any substantial overstatement of pension liabilities is identified by the EP specialist.

20.1.8.1.2.2  (04-17-2009)
Penalty Relief

  1. IRC section 6664(c) provides a defense to the penalty with respect to any portion of the underpayment if it is shown that there was a reasonable cause for such portion and the taxpayer acted in good faith with respect to such portion. If the taxpayer can show reasonable cause and good faith, the penalty should not be asserted.

  2. See IRM 20.1.1 or IRM 20.1.5.6 for a discussion of penalty relief.

20.1.8.1.3  (04-17-2009)
How to Assess and Abate— EP Procedures

  1. Penalties on Employee Benefit Plan forms are assessed on Non-Master File.

    To assess penalties... The EP specialist must complete...
       
    Associated with income tax forms Form 5734, Non-Master File Assessment Voucher. Form 5734 and the case file (source documents) will be sorted by MFT code and forwarded to the service center Receipt and Control function on Form 3210, Document Transmittal.
       
    NOT associated with an income tax return Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties. (Caution: ALWAYS use the most current version of Form 8278 and select the appropriate IRC for applicable penalty AND penalty reference number (PRN).

20.1.8.1.4  (04-17-2009)
Section Outline

  1. The following penalties are discussed in IRM 20.1.8.2, Exempt Organizations and Certain Trusts:

    • IRC section 527(j)(1)

    • IRC section 6652(c)

    • IRC section 6684

    • IRC section 6685

    • IRC section 6710

    • IRC section 6711

    • IRC section 6714.

  2. The following penalties are discussed in IRM 20.1.8.3, Employee Plans:

    • IRC section 6652(d)

    • IRC section 6652(e)

    • IRC section 6652(h)

    • IRC section 6652(i)

    • IRC section 6690

    • IRC section 6692

    • IRC section 6693

    • IRC section 6704
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